Difficult First Self Storage Deal

[Bob Vollmer]

Alright BP and @Henry Clark. I could use some advice on how to lock this property down. I'll do my best to keep this succinct, but there are some topics that may need further explanation. Here's the scenario:

Motivation: Seller moved out of the area a few years ago for family reasons and has had her old neighbor manage the facility. She had been holding onto one of my mailers for a couple months and after a string of break-ins back in July reached out to see if I wanted to buy the property. She owns it free and clear. 

Property details: Built back in the late 80's and early 90's and it has stayed there. 3 drive up buildings with ~9,800 rentable square feet. Unit mix is 16 5x10, 80 10x10 and 5 10x20. Old chain link fence around 3/4 of the property. No barbed wire. No gate. No electricity. No lights. No security. Everything is done old school (ie pencil and paper) and records are virtually non existent. 2 of the 3 buildings are traditional drive-ups on concrete pads - these are in OK shape at best but definitely not great. Last building is a row of old portable units (from the 80's) that are showing their age. No pavement, all gravel. Steep drive from a county road leading down into the facility makes it difficult to add a gate. 1/2 the property is in the 100 year flood plain. Great location and visibility, but zero room to expand. Only value add is improved management, adding online setup/pay, security, raising rents and quality of the facility itself.  The area has a HUGE demand for storage with limited supply - nearly everywhere is full. Due to geographic constraints, buildable land that is zoned correctly is almost non-existent. The town that it sits in is only 6,000 people and the has openly said that they do not want any more storage. 

Financials: Seller shows rents received as $55,300 - but once you include the cash they've been collecting, rents received is closer to $62,000/yr. Rents are significantly below market rates but since the facility is so old and unable to offer the same level of quality, I'm not sure how close to market I can get. Leaving the current buildings where they sit and doing a little improvement to the security and management, I'm confident that I could get it closer to $75,000-$80,000 gross. Seller wants "mid to high $500's". Willing to owner carry but wants at least $75,000 down, $2,500 monthly payment, a "reasonable" interest rate and either a short term or a 5 year "additional down" lump payment. Property will not appraise for even close to what she wants with traditional financing. She's trying to sell it at a 4 cap...

Competition: There is a brand new facility directly across the street with much higher rates - but they're on a paved lot, nice security fence, gated, security cameras, lights, etc. They're 100% full. Another facility sits roughly 4-5 miles away and has the same upgrades as the brand new facility minus paving and is also 100% full with much higher rates. The next town over (~7 mi.) has a few nicer, newer facilities that are also full. The big caveat is there are two new facilities in the works that will add ~60,000 rentable sqft. but seem to be intended for use by the apartments and tiny homes being built around them. 

Struggles: 1) steep entrance off of a fairly busy road makes it tough to add a gate. 2) ballpark quote from electrician to run power to property and add lights is ~$40,000. 3) The town has told me that if I replace the old portable units, I would have to put a water storage tank and a fire hydrant on the property. Waiting on cost. 4) If I use traditional financing, I would need flood insurance which would add ~$5,000/yr. to my costs. 5) If I were to replace the portable units with a traditional drive up, I'm ball parking a cost of ~$120,000 from soils test to install. 

Questions that I have:

1. How important is it to have a gate if you have lights? 

2. Would you rather have a gate or cameras at your facility?

3. How would underwrite a row of buildings that are near the end of their life expectancy but are still operable (they have minor water intrusion issues, I've heard of claims of rodents going through wooden floor, etc.)?

4. How much weight would you give the facts that the town doesn't want anymore storage built and there is a huge demand?

5. Would you ever consider replacing old portable units with new portables just to get around city requirements associated with building permits? From my understanding, portables don't last as long and don't really save much money.

There is a ton of additional information and questions but considering this post is already a small book, or at least a sizable pamphlet, I'll end it here. I'd appreciate any input or conversation regarding this place. There's a ton of potential but it will come with a large cost and a lot of work....

[Henry Clark]

@Bob Vollmer

a.  Do you plan to do more Self Storage?  If not, don't do this deal.  If you do, then the learning part of this is worth it, if the numbers come close.

b.  Market strength- Someone has to be the low-cost provider.  Thats your strength in this market.  Do a rent rate analysis on the 80 10x10's.  Don't worry about the other sizes, you don't have that many.  Even with your future rate hikes are you still the low-cost provider by say $20/$40 per month?  You're not competing against the other new locations.  6,000 people, this is a market of around 400 units; Count the number of units existing.  Are there lots of people outside the town?

c.  Financials:  Change these figures to boots on the ground.

Rent-  $62,000 per year, don't use your "improved" numbers.

Insurance- $2,500

Prop tax- $5,000

Maint.- $3,000

Electric- add.  $2,000

Camera and alarm system- $500 per year, about $25,000 up front to install.

Gate and fence- don't do, tear out the old fence and do something that looks good. $0 per year.

Management- you, do you live local.

Water/fire hydrant- don't do.

Old portables- either 20 foot cargo containers for $4,500 each if available, or $7,000 for 8 x 20 portable metal. No property taxes, permits, or fire hydrant.

Depreciation expense- do as much year one write-off to get up front cash flow, from reduced taxes.

P/I at $2,500 per month at say 5% interest = $2,625 per month times 12 = $31,500 per year.

Income taxes= $?????

After all of the costs above, depreciation- then add back for cash, income taxes, interest expense; let's say cash flow of $45,000.

Less P/I of $31,500 per year.  Keep in mind each $2,500 you pay in each month, your building equity.

Net cash flow of say $13,000 per year.

Is this a good deal?

No-  $550,000 less $75,000 down.  $2,500 per month would be about a 16 year payback.  Better than most investments but not within our parameter of 8 to 12 years.  Now take the $2,500 per month, add in the additional Cash flow of $13,000 per year, for a potential payment of $33,000 per year; then a payback of $550-$75/$33= 14.39 years.   

Yes- Still not where I like, but you are building equity in a market where stocks and bond don't look good and fighting for SFH/MFH deals is hard and you need appreciation as your goal. Most importantly though, back to my first question, are you going to do more than one deal? Then the learning will be worth it.

The Deal:

a.  This is off the market.  Lock down the deal.  Make an offer, with a due diligence period of 45 days.  Put down a redeemable deposit of $10,000 to lock the deal down.

b.  Lock down the rent roll first.  Do the rate comparison on the 10 x 10's next.  Make sure you will be far enough under market to attract the Cost Conscious.

c.  Offer Starting point- three-day offer, Total of $530,000; $75,000 down, 5% interest, 5-year balloon, with $2,000 per month principal payment plus interest, $100,000 noncompete agreement as part of the $530,000; Everything is negotiable, explain that to them.  I would start with the overall number that works for you, then work your way up.  IE change the $530,000 as needed.

d.  Break the offer down as follows, do an asset purchase and not a company purchase:  This will help support a Cost segregation for tax purposes.  This is the last year you can do 100%.

- $100,000 Noncompete agreement- 15 year amort life, thus you can write off in year one for tax cash flow, loss carryforward if not used.

- $200,000 Concrete pad structures- keep as much away from this as possible since longer depreciation

- $100,000 portable buildings- based on conditions, do 15 year life and write off.

- $20,000 roads- 15 year life or less write-off

- $10,000 fence- 15 year life or less, write-off

- $100,000 land- keep as low as possible since you can't depreciate.

Talk with your Tax person and see if you can do year one tax write-off.  You're a real estate agent?  Ask them about your professional standing.

Keep a little cash on the side for repairs.  a.  Doors, b.  Road, c.  Paint, d.  Roof overlay.

If there is a lot more demand and this is in a great location, use it as your advertising.  Then find a spot out of sight you can send people to.

Calculate your Failure:

Do a few Failure scenarios.  Then determine if this is acceptable.  Most people never invest, not because of the profit or success potential, but because of the boogey man or failure and they don't wrap their arms around it.  Failure can still be positive cash flow, just not as good as you projected.  But at least you started down the road.

Start small and Make Your Big Mistakes Early.